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Elecon Engg: Core profitability surprises - Views on News from Equitymaster
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Elecon Engg: Core profitability surprises
Nov 16, 2012

Elecon Engineering has announced second quarter results of financial year 2012-2013 (2QFY13). The company has reported a 1.7% YoY decline in sales. However, net profits have increased by 47.5% YoY during the quarter. Here is our analysis of the results.

Performance summary
  • Total income declined by 1.7% YoY in 2QFY13.
  • Operating profits increase by 25.2% YoY during the quarter despite a muted performance at the topline level due to 6.2% YoY fall in operating expenditure.
  • Net profits increase by 47.5% YoY due to strong performance at the operating level.
  • As of 30th September 2012, the debt/equity ratio of the company stood at 0.99x
  • The order backlog as of 31st October 2012 stood at Rs 15 bn.
  • For FY13, capex is expected to be in the region of Rs 500 -600 m.

Standalone performance summary
(Rs m) 2QFY12 2QFY13 Change 1HFY12 1HFY13 Change
Total income  3,354 3,297 -1.7% 5,897 5,654 -4.1%
Expenditure 2,871 2,692 -6.2% 4,992 4,738 -5.1%
Operating profit (EBDITA) 483 605 25.2% 905 917 1.2%
Operating profit margin (%) 14.4% 18.3%   15.4% 16.2%  
Other income 18 17 -6.1% 48 59 23.5%
Interest 145 164 13.1% 280 309 10.5%
Depreciation 108 121 11.5% 207 235 13.6%
Profit before tax 248 338 35.9% 467 432 -7.5%
Tax 93 108 16.5% 162 138 -14.7%
Profit after tax/(loss) 156 230 47.5% 305 294 -3.6%
Net profit margin (%) 4.6% 7.0%   5.2% 5.2%  
No. of shares         92.9  
Basic  earnings per share (Rs)         3.2  
P/E ratio (x)*         6.9  
(*On a trailing 12-month basis)

What has driven performance in 2QFY13?
  • Elecon's total income declined by 1.7% YoY during 2QFY13. Revenues (excluding inter-segment adjustments) from material handling equipment (MHE) and transmission equipment (TE) businesses declined 0.7% YoY and 5.1% YoY respectively.

    Segment-wise performance
    (Rs m) 2QFY12 2QFY13 Change 1HFY12 1HFY13 Change
    Material Handling Equipment (MHE)
    Revenue 1,922 1,909 -0.7% 3,347 3,119 -6.8%
    % share 55.8% 56.9%   55.1% 53.6%  
    PBIT margin 13.3% 15.4%   13.4% 13.0%  
    Transmission Equipment (TE)
    Revenue 1,521 1,443 -5.1% 2,729 2,696 -1.2%
    % share 44.2% 43.1%   44.9% 46.4%  
    PBIT margin 13.8% 18.2%   14.4% 16.2%  
    Total
    Revenue* 3,443 3,352 -2.6% 6,076 5,815 -4.3%
    PBIT margin 13.5% 16.6%   13.9% 14.5%  
    * Excluding inter-segment adjustments

  • Operating margins expanded to 18.3% during the quarter from 14.4% in 2QFY12. This was mainly due to fall in raw material cost as a percentage of sales. The raw material cost fell from 65.3% in 2QFY12 to 61.4% in 2QFY13 during the quarter. However, staff costs increased from 5.5% in 2QFY12 to 6.6% during the quarter.

  • Net profits grew by 47.5% YoY during the quarter due to strong performance at the operating level.

What to expect?
At the current price of Rs 52, the stock is trading at a multiple of 6.9 times its trailing twelve month earnings. The overall performance in the current quarter was noteworthy especially on the profitability front. Despite a decline in revenues, management was able to post a healthy growth of 25.2% YoY in operating profits. This came in as a big positive surprise. For FY13, management expects topline growth of about 7-8%. Considering the 1HFY13 performance (4.1% YoY decline in revenues), it would be interesting to see whether management is able to meet the full year guidance.

As far as the restructuring goes , it may be noted that only 18.4% investors have voted against the scheme of arrangement. Hence, it is likely that the restructuring will go ahead after the high court's approval. Taking into consideration the long term potential, we maintain our BUY view on the stock.

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